Supply and demand

In microeconomics, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.

Supply and demand is the driving force behind market based economies. Supply is the amount of a product in a market, and demand is how desirable the product is to the consumers.

The Law of Supply

The higher the market price climbs for a product, the more likely businesses will produce a larger quantity of that product to maximize the money earned from the market. Products that have lower prices, and a smaller profit return on the product, will be less likely to be supplied as that in turn means they make less money for the producer. A chart of a supply line should have the price on one axis, and the quantity on the other. As prices go up, quantity would go up as well, having the supply line rise in an upward slope.

The Law of Demand

The higher the price in the market for a product, the less people will demand to have the product. If purchasers can’t afford a product, or if the price is too costly without having enough benefit in owning a product, then the consumers in the market will look to other options instead. This is an opposite reaction from the supply side. To chart demand, use price and quantity on each axis as well. The line should start at a high price and low quantity, moving towards low prices at high quantity, creating a declining slope.

Knowing the right amount of product to release helps keep the market at an equilibrium, which is a point where the supply and demand are balanced. A surplus occurs when too much supply exists in the market, and it can drive prices below what is necessary to make a profit from the product. If too little supply is available that is called a shortage, and that can inflate the cost of a product due to its current scarcity in the market.

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